Repo rate cut brings relief to MFs

Mutual funds (MFs) heaved a sigh of relief on Monday after the Reserve Bank of India (RBI) announced a repo rate cut of 100 basis points.

Repo rate is the rate at which RBI lends to banks.

“The sentiment will definitely improve,” said Arvind Chari, fund manager-fixed income at Quantum Mutual Fund.

A cut in the repo rate usually signals a fall in interest rates. However, this time, the repo rate cut coupled with the reduction in the cash reserve ratio (CRR) or the amount of money that banks have to keep with RBI, will help stabilise the banking sector, analysts said.

“The RBI move will stabilise the banking sector and reduce the borrowing/lending mismatch, which caused volatility,” said Ashish Nigam, head-fixed income at Religare-Aegon MF.

An immediate impact of the repo rate cut may make the mark-to-market valuations of government securities and corporate debt attractive. But, MFs might find it difficult to sell paper issued by non-banking finance companies, as investors fear defaults in the sector.

“Business houses are withdrawing money from liquid and liquid-plus schemes as they cannot get funding from banks. The repo rate cut will bring more liquidity into banking and banks can then lend more. In turn, inflows in short-term debt funds will rise,” said Mohit Varma, chief investment officer-fixed income at JM Financial Mutual Fund.

To further ease pressure, RBI will extend the liquidity window for MFs till further notice. Banks can, thus, lend to MFs against certificates of deposit (CDs). Banks can also buyback their CDs from MFs. Earlier, this facility was available only for 15 days.